XIRR vs CAGR: Understand Your Real Returns

When it comes to understanding investment performance, two terms often pop up: CAGR (Compound Annual Growth Rate) and XIRR (Extended Internal Rate of Return). While both talk about “returns,” they work very differently.

If you've ever asked:

• “What’s the real return on my SIP?”
• “Why does my mutual fund statement show XIRR, not CAGR?”
• “Which number tells me the truth?”

…then this guide is for you. Let’s break it down in simple, Indian investor language.

What is CAGR?

CAGR is a way to know how much your investment grew annually on average, assuming you invested once and just waited.

Example:

You invested ₹1 lakh in a fixed deposit. After 5 years, it grew to ₹1.5 lakhs.

The CAGR is the average rate at which it grew each year.

Formula:

CAGR = [(Final Value / Initial Value) ^ (1 / Years)] – 1

In our case:
= [(1,50,000 / 1,00,000) ^ (1/5)] – 1
≈ 8.45% CAGR

You earned 8.45% every year as if it grew steadily.

When to Use CAGR?

CAGR is best used when:

• You invested a lump sum once
• No additions or withdrawals happened in between

Real-life examples:

• Fixed Deposit (FD)
• PPF or EPF (if no partial withdrawal)
• One-time stock purchase

What is XIRR?

XIRR gives you the true return when your cash flows happen at different times - like in SIPs, top-ups, or redemptions.

Example:

You invest ₹5,000/month in a mutual fund for 12 months. Total investment = ₹60,000. At the end of the year, it’s worth ₹65,000.

You can’t use CAGR here because the money went in gradually, not all at once.

This is where XIRR steps in:

• It tracks each investment date and amount
• Accounts for time gaps between investments
• Reflects the actual annualized return

Mini SIP Example Table

In Excel, you’ll enter:

• All 12 SIP amounts as negative values (outflow)
• ₹65,000 as positive value on Jan 1, 2025
• Use: =XIRR(values, dates)

It’ll give you your true return, accounting for time difference between each SIP.

When to Use XIRR?

Use XIRR when:

• You’re doing SIPs or recurring investments
• You redeem partially or top-up irregularly
• There’s any non-lump sum movement in or out

Real-life examples:

• Mutual Funds via SIP
• ULIP premiums and withdrawals
• Real estate with phased payments
• Equity investing with staggered entries/exits

XIRR vs CAGR: Side-by-Side Comparison

Real-Life Analogy

CAGR is like planting one tree and watching it grow evenly over 5 years.
XIRR is like planting a tree every month, some grow faster, some slower - you calculate the true growth of the whole garden.

FAQs on XIRR and CAGR

Q1. Can XIRR be negative?
Yes. If your investments performed poorly or you withdrew early, XIRR may show a negative return.

Q2. Why is XIRR different from AMC report?
Slight variations can happen based on the exact date input, reinvestments, or NAV delays.

Q3. Can I use CAGR for SIPs?
No. SIPs are spread across time. CAGR oversimplifies. Use XIRR.

Q4. Does XIRR include dividends?
Only if you add dividends as positive inflows with dates while calculating in Excel.

How to Calculate XIRR and CAGR Easily

In Excel / Google Sheets:

CAGR:

• Use the formula [(Final / Initial)^(1/Years)] – 1
• Or try =RATE() with correct inputs

XIRR:

• List all investment amounts (like SIPs) as negative values
• Final redemption as positive value
• Use =XIRR(values, dates)

Want to try it yourself? Download sample Excel file

Final Takeaway

Disclaimer: The content in this article is for informational purposes only and does not constitute investment recommendations. Please consult a financial professional before making investment decisions.